Keep it, sell it, or die with it may seem like strange choices, but with highly appreciated assets, those may be the very choices that need to be considered. Examples of highly appreciated assets include real estate and stock investments which have gone up significantly in value. Let’s look at an example.
To Sell Or Not to Sell?
Take a large tract of farmland for example. Its value may be approaching $8,000 per acre so “sell it now” may be the landowner’s first thought. However, if the rent received or the crop it is producing, is more than interest the $8,000 would get you at the bank, perhaps selling is not the wise choice. This concept is called an investment’s rate of return. We can help you calculate the rate of return the farmland is bringing now compared to the rate of return the $8,000 (less taxes) will bring as part of your nest egg.
What’s the Calculated Gain?
Speaking of taxes, if you sell, do you get to keep all of the $8,000? Ideally, yes. Realistically, Uncle Sam will want tax on any gain that selling the farmland will net. Due to the farmland being a capital asset, the tax rate will likely be 15%. Presuming a $6,000 gain, it will result in $900 of tax, leaving you with only $7,100 per acre to put in the bank. Let’s go over that again. Gain is calculated by using the selling price of 8,000 minus the cost when it was bought or inherited. If we assume that cost is $2,000, the resulting gain would be the $8,000 minus the $2,000 cost, so $6,000 is the gain. That gain is taxed at a 15% rate, so 6,000 times the 15% rate equals $900 of tax. Cash remaining from the sale is the $8,000 selling price less the $900 tax leaves $7,100 per acre to put in the bank for that nest egg.
It All Adds Up!
The $900 tax from the example above may not sound like a big number, but if that tract of farmland is 1,000 acres, suddenly we are talking close to a million dollars in taxes. In this case, dying with it may be the right choice since the IRS provision allowing a step up to fair market value at date of death is still in place. The step up means, whoever sells it, your estate or your heirs, will get the $8,000 cost per acre and have no gain, so no tax. Keeping an asset now so you can die with it later may seem like the same choice, but they come with separate considerations. An older retired taxpayer may be considering taxes saved by dying with the farmland, where a young farmer will focus on keeping it or selling it.
As you can see, many factors come into play for each decision when dealing with highly appreciated assets. A few choices we haven’t even touched on like like-kind-exchange or gifting may also be the right choice. Other factors like a taxpayer’s age, retirement goals and family situation may make one choice better for them. Please come in to discuss your unique situation and we can help pick the right choice for you.
Darcee Ayers is a Tax Manager with 28 years of experience in the public accounting profession. Darcee specializes in exempt organization tax issues as-well-as trust and corporate taxation. She is currently a member of the Iowa Society of CPAs and the American Institute of Certified Public Accountants.